What is Green Shoe on the Stock Market?

The Green Shoe clause is a right that an entity that manages the exit to bag of a company, normally investment banks, which allows placing a certain number of shares, between 5% and 15%, of the company's total shares. This fact occurs when a OPV, that is, a Public Sale Operation, and the managing entity sees it necessary to bring more capital to the market, because it has analyzed the situation and foresees that there will be a strong demand for the purchase of shares.

The origin of the Green Shoe clauses is in the company Green Shoe Manufacturing Corporation, when the company that managed the placement of its shares decided to use this system in 1960, taking more capital to the market.

Benefits of the Green Shoe clause

The Green Shoe mechanism serves to stabilize the sale price of the company's shares when it begins its IPO. In the event of high demand, the value of the shares may increase and cause a rise in prices, resulting in no investors buying the shares.

It is clear that the Green Shoe clauses are used much more when a company is already consolidated and wants to dispose of some shares than when the company is new, since the market reaction is much clearer and known in this second case, so the risk is much lower.

Green Shoe practices are subject to some criticism, since they can be used by banks and other capital management entities to obtain large profits. You can issue these benefits at a higher price or keep that benefit and sell it in the future when the price has risen. It is what is called speculation.

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